What’s next for gold? This key mining deal could be the decider

Beware the Ides of March – at least if you’re a gold investor.

March has a nasty habit of producing reversals in the gold market.

This year looked like being an exception. The first two weeks of the month saw gold’s near-vertical start to the year continue. Just as Julius Caesar began to get complacent when the Ides came with no apparent trouble, so perhaps did gold investors.

And then the correction began.

Today we play the role of soothsayer and ask how bad it will get: is gold about to get murdered?

Gold has slipped back – but it’s still looking good

After hitting a high on Monday at $1,392 an ounce, gold was trading at $1,350 yesterday.

After a $200 rise in two months and a bit, and the extreme sentiment that pours out whenever gold has a rally like this, some kind of pause for breath was due.

By pause for breath I mean some kind of retracement. To retrace half of those gains would not be abnormal.

However, even if that happens, I have to say that gold is starting to look pretty good again. On the chart below, I have defined gold’s downtrend since its late 2012 highs with two blue tramlines. You can see the very definite breakout, which I have circled in red, at the $1,325 mark.

Gold price chart

Source: StockCharts

Meanwhile, gold is sitting above its 21-day simple moving average (the green line in the next chart), the 55-day (orange) and the 144-day (blue). And all of these averages are all sloping up.

Gold has even broken above its falling 52-week moving average (red). A further confirmation that we have a new trend in place, will be if this flattens out and starts rising.

Gold price chart

Source: StockCharts

Trends are powerful things. They can go on for many years, and the signs are that a new one is developing. The alignment of the moving averages is not yet ideal and there many hurdles to get through before we can even think about re-testing the old highs of 2011 – let’s just get to $1,500 first, or even $1,400 – but the omens are good.

I’ve tried to identify some of those areas of resistance on the chart below. These are potential areas where gold might stall in the coming months, should its rally continue. Again it is a one-year chart.

Gold price chart

Source: StockCharts

There’s resistance just below $1,400, at $1,425, $1,475 and a huge wall of it at about $1,520.

As for this current downturn, there’s support at $1,350, $1,325 and strong support at $1,275 and $1,250-$1,270. And of course, there’s $1,180.

I’m going to stick my neck out and say we go back as low as $1,300 or just below on this correction – perhaps by June – but not much further. To give back $100 after a $200 rise is not abnormal.

It could just as easily consolidate at $1,325 or $1,350 – in fact, $1,350 is the low of the day so far – but bold predictions are more fun (and you’re more likely to be wrong), so we’ll go with, hmm, $1,275.

If you like these things, you’ll notice what a lovely W-shaped bottom gold has put in with its July and December 2013 lows.

Watch this crucial mining deal

But I think that by Monday, we’re going to get a big clue as to the direction of gold and, particularly, gold miners over the next few months. One thing that kick-started this rally in January was the proposed takeover of Osisko Mining (TSX:OSK) by Goldcorp (NYSE:GG) for $2.6bn – $6.78 a share.  Osisko is now trading at a dollar premium to that.

Osisko is having a conference call tomorrow to try and recommend that shareholders reject the deal. The offer closes on Friday. Goldcorp will then either have to up the ante or walk away from the deal.

Whatever the companies decide will send a big message to the market. Osisko is a not a cheap producer – it is not producing gold at $500 an ounce. If a bulk-tonnage, low-grade miner is considered to have value at $1,350 an ounce and it gets taken out, that sends a very positive message to the market. All those people invested in other possible take-out candidates will stay long – and other money will follow.

But if the Goldcorp walks from the deal, then the message is rather more negative and the opposite will happen. Other speculative money will also walk.

So it’s worth keeping an eye on that. It’ll give a good idea both on how bullish sentiment really is in the gold industry, and it could help shape the direction for gold in the short term.

However, whatever happens in the short run, the longer term trend is still looking positive. And I’ve got an itchy feeling that gold’s going to come in pretty handy over the next couple of years, Ides of March or not.

• Dominic Frisby is crowd-funding his latest book, Bitcoin – the Future of Money. His first book, Life After The State, is available at Amazon. An audiobook version is available here.

• Follow @dominicfrisby on Twitter.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

Our recommended articles for today

How to profit from company turnarounds

David Thornton examines the four elements of a successful company turnaround, and looks at one small-cap company that’s hoping to transform its fortunes.

An overlooked sector for long-term investors

This profitable sector isn’t well promoted, says Merryn Somerset Webb. But if you’re willing to be patient, it could be just the ticket.

66% off newsstand price

12 issues (and much more) for just £12

That’s right. We’ll give you 12 issues of MoneyWeek magazine, complete access to our exclusive web articles, our latest wealth building reports and videos as well as our subscriber-only email… for just £12.

That’s just £1 per week for Britain’s best-selling financial magazine.

Click here to take advantage of our offer

Britain is leaving the European Union. Donald Trump is reducing America’s role in global markets. Both will have profound consequences for you as an investor.

MoneyWeek analyses the critical issues facing British investors on a weekly basis. And, unlike other publications, we provide you with the solutions to help you turn a situation to your financial advantage.

Take up our offer today, and we’ll send you three of our most important investment reports:

All three of these reports are yours when you take up our 12 issues for £12 offer today.

MoneyWeek has been advising private British investors on what to do with their money since 2000. Our calls over that period have enabled our readers to both make and save a great deal of money – hence our position as the UK’s most-trusted investment publication.

Click here to subscribe for just £12